It is no surprise that the US budget sequestration, which took effect in March and resulted in cuts to the funding of major federal government research agencies (see IBO 3/15/13), is affecting instrument and lab product company revenues. Based on comments made on recent quarterly conference calls of publicly held instrument and laboratory product companies, the effect has been uneven but notable. In fact, cautious spending by labs in anticipation of the sequester was already affecting sales prior to March.

Outside of the immediate effect on sales growth, the sequestration has likely accelerated some companies’ efforts to diversify their end-markets and geographic mix. Among the companies that have in recent years and continue to diversify into industrial, applied and diagnostics markets are Affymetrix, Bruker, Illumina, Life Technologies and Luminex.

The uncertainty about the extent of the sequester, which is scheduled to last for eight years unless Congress passes new legislation, has added to companies’ cautiousness about US academic and government markets. In fact, many companies commented on quarterly conference calls this year that they do not expect these markets to turn around any time soon.

Smaller sized, more focused companies with a larger proportion of government and academic customers are more exposed to the sequestration’s effects. As comments by two companies indicate, life science research is one field in which the impact is notable. In their third quarter conference calls, Affymetrix and Pacific Biosciences described the effect of the sequestration on their revenues and possibly future revenues. Answering a question regarding the company’s eBioscience business, Affymetrix President and CEO Frank Witney said, “It’s still very tough in North America. The sequester is a real challenge, but it’s a challenge for everybody.” In the second quarter, Affymetrix reported a 5% decline in sales for eBioscience in North America, in contrast to growth for the business in other regions. EBioscience products include antibodies, fluorochromes and reagents.

Another company that primarily supplies life science consumables is Techne. During the firm’s first quarter fiscal 2014 conference call last month, CFO Gregory Melsen, commented on the sequestration and the recent government closure (see IBO 10/15/13). ”We don’t know how long this will last. But what is known is that the disruption and angst in the academic research labs will remain high until there’s clarity regarding the NIH budget.” The company’s quarterly sales to US academia fell 11.8% in the quarter. As Mr. Melsen noted, it was the ninth consecutive quarter of a decline in sales to US academia. Regarding the future, President and CEO Charles Kummeth stated: “However, [with] the arbitrary cuts from sequestration and the recent government shutdown, again, researchers have good reason to be cautious in their spending. We expect the sales for this group of customers will be under severe pressure in the near future.”

Reflecting on what the company has heard from its customers, Mr. Kummeth added, “They’re being very careful with their purchases. They don’t know what’s coming, so they’re being real watchful in their experiments. And they’re not overbuying. They’re not stocking up. They’re holding back. They’re being told to cut back. They probably are experimenting with some other lower priced competitive situations as well, all of the above.”

The effect of sequestration on consumables streams tied to dedicated instrumentation was addressed by Luminex on its third quarter conference call by CFO Harriss Currie. “As noted in our second quarter call, our LSR [Life Science Research] focused partners had cited lower consumable utilization per installed system due to tightening research budgets in the US with the implementation and sequestration on April 1st as well as tightening of research budgets in other select countries.“

The sequestration was also discussed by Pacific Biosciences, a company whose sole instrument product line are DNA sequencers and the consumables and software for the systems. In response to a question during the company’s third quarter conference call regarding bookings guidance, Pacific Biosciences President and CEO Michael Hunkapiller said, “The issue we were trying to highlight was that, clearly, there are a lot of budget negotiations going on. And that does impact a lot of these agencies’ ability to go ahead and pull the trigger on additional purchases.” The comments highlight the uncertainty around the future of the US government budget, including the sequester.

Besides advanced instrumentation, more modestly priced laboratory systems also appear to be affected. Harvard Bioscience’s Life Science Research Tools business supplies consumables as well as mid-range priced laboratory products. The company reported in its third quarter SEC filing that sales of its Harvard Apparatus business, whose products include syringe pumps and cell injection technologies, were adversely affected by the sequestration.

However, as the company noted on its conference call, Harvard Apparatus’s North American business grew modestly during the quarter. “[O]ur performance was soft in Q3 as our customers continued to feel the effects of government austerity and US sequestration, especially in the academic and government markets. Due to these events, we will continue to face headwinds through Q4,” commented new President and CEO Jeffrey Duchemin.

Although the overall impact of the sequester on larger companies has been less notable, the sequestration has selectively impacted lab product lines and businesses. Two of the largest companies in the in vivo animal imaging market, Bruker and PerkinElmer, both noted the effect this year of sequestration on sales of systems. PerkinElmer CEO and President Robert Friel stated on the firm’s third quarter conference call that sales for in vivo imaging products grew in the quarter, but commented, ”I think sequestration continues to have an impact on dampening some of demand there.”

This is a second straight quarter of growth for the product line following an unexpected drop in first quarter sales (see IBO 5/31/13), which the company partially attributed to sequestration. In the company’s second quarter call, he said, “So I would say, if we look at the US, first of all, academic continues to be a headwind. And so I think while the uncertainty around sequestration is not what it was in the first quarter, we continue to see funds moving relatively slowly from a capital acquisition perspective. So I would say academic continues to be relatively slow.”

Bruker experienced a similar pattern for its in vivo imaging sales this year, with a drop in first quarter sales, and gradual strengthening since then. The company has also observed the effect of the sequester of mid-range priced items, according to its third quarter conference call. During the call, President and CEO Frank Laukien, PhD, stated, “US sequestration does have an effect, even more so on the smaller $50,000 to $250,000 research items that academic customers would like to buy and then have a tougher time getting funding.”

However, on the firm’s second quarter conference call, Dr. Laukien noted the sequestration has less of an impact than expected. “So far, sequestration, it seems to be not as bad as we had feared. It appears to maybe have more of an effect on routine, lower average selling price instruments where some of our businesses have said ‘look sequestration plays role in weaker demand in the US.” In both calls, he noted the lack of detectable effect on sales of higher priced systems, such as NMRs and MRIs.

Another diversified company experiencing the effects of sequestration on its lab instruments and consumables revenues is Thermo Fisher Scientific. Discussing third quarter US academic and government market sales, President and CEO Marc Casper commented, “Our customers continue to feel the effects of sequestration, along with the added uncertainty leading up to the budget stand off late in the quarter.” On the call, he noted the effect on the company’s Analytical Technologies, and Laboratory Products and Services (LPS) businesses, noting a greater impact on Thermo’s sales of routine capital equipment. However, the sequestration remains an issue for LPS business as well. “Weakened conditions in the US academic and government end-market as a result of sequestration and the uncertainties surrounding the government shutdown continued to be a headwind in this segment noted CFO Peter Wilver.